Above Or Below The Line? Eleventh Circuit Drops Anchor On Taxpayer’s Hobby Loss Argument

When wealthy taxpayers pursue activities that may throw off some revenue, there is a temptation to treat those activities as a trade or business that may generate valuable above the line tax deductions. Section 183 and boatloads of case law amplify how one must prove the profit intent necessary to treat those activities as a trade or business.

What happens though if the activity is not a trade or business but there are still expenses? Section 183 is technically an allowance provision: it generally provides that a taxpayer can deduct the expenses up until the activity’s income. But those expenses are no longer above the line, and are taken after establishing a taxpayer’s AGI.

That takes us to Gregory v Commissioner, which I discussed earlier this year in A Quick Hobby Loss Refresher: Why These Losses Are Useless (At Least Until 2026). As I discussed, Gregory involved taxpayers who had a Caribbean-based boat chartering business, and the Tax Court treated the activity as one not engaged for profit. The taxpayers had a few hundred thousand dollars in revenue from the yachting activity. As the expenses from the activity were less than 2% of their AGI they were unable to benefit from Section 183. In effect, those expenses were treated like any other expense not connected to a trade or business, that is, they were not deductible.

In Gregory, the taxpayer argued that Section 183, as a more specific statutory provision, should in effect preempt Section 67, with the result that the allowance of expenses under 183 means that those expenses could be deducted above the line to establish AGI.


The Tax Court disagreed, finding that the statutes were not in conflict; rather it just “assumes there is conflict between these two provisions of the Code when in fact each provision may be given effect without precluding or otherwise undermining application of the other.”

On appeal, in a published opinion, the Eleventh Circuit affirmed the Tax Court. There is a majority and a concurring opinion, and for readers interested in understanding the structure of individual taxation, I recommend a read.

The majority opinion mostly follows the reasoning of the Tax Court opinion, finding that the plain language of Section 183 and Sections 62, 63 and 67 mandates treating expenses from non for profit activities as itemized deductions.

The concurring opinion takes a somewhat different tack. It looks to plain language, but only focuses on Section 183 and not Sections 62, 63 and 67. In looking at Section 183 alone, the opinion notes (as does the majority opinion) that the language of that section does not unambiguously classify the expenses as above the line or below the line.

Rather than look to those other sections, the concurring opinion looks to later legislative history. In the legislation known as the TCJA, the conference report specifically mentions 183 deductions as the type of miscellaneous itemized deduction that is no longer allowed, even if they exceeded 2 % of the taxpayer’s AGI.


The taxpayers argued in the alternative that the result was absurd and would justify treating the expenses as deductible. The opinion notes that the absurdity doctrine applies only when “the absurdity is ‘so gross as to shock the general moral or common sense.’” Quoting Packard v. Comm’r, 746 F.3d 1219, 1222 [113 AFTR 2d 2014-1532] (11th Cir. 2014). Here, as the opinion notes, Congress seems to have purposively and “Congress can cap or reduce taxpayer eligibility for a tax deduction if it wants, and, here, it elected to do so.”

The combination of the TCJA and Gregory effectively takes the wind out of the sails of the allowance aspect of Section 183.

Guardianship Dispute Between Aunt and Niece Leads to Imposition of Tax Penalties and Injunction

The case of Muldrow v EZ File & Aleenah Cittendon involves a family dispute that implicates the Internal Revenue Code’s civil penalty for the fraudulent issuance of an information return.  Angelica Muldrow and Ajeenah Crittendon, Muldrow’s aunt, have been in a longstanding dispute concerning guardianship over Muldrow’s mother, Crittendon’s sister. The relationship deteriorated over 2021 and 2022, with hostile phone calls, emails and text messages.

In the summer of 2021, Crittendon emailed Muldrow, demanding that she return jewelry:

As I stated you have until Sept. 28th to return. If I don’t receive them back . . . it simply means you received something of value that you refused to return. You will be assessed the appraisal value of each piece x 3. It [sic] called damages/fraud, so play your games with someone else. When IRS come knocking at the door for the taxes including Georgia Dept of Revenue let’s see how far you get with playing your games! . . . If you want to continue sending your emails I will bill you at my billable rate and forward to you my Invoice. Pay it or not pay it. If you elect to not pay it you will also receive a 1099-Misc. for my labor!

Not every day that a family disagreement leads to a threat to issue an information return, but Crittendon knows her way around tax forms, given that she owns and operates EZ E-File, a California based tax prep business.  That leads us to Section 7434, which imposes a civil penalty on someone who issues a fraudulent information return. Damages are the greater of $5,000 or actual economic damages. We have discussed 7434 before, with a focus on whether it can serve as the basis for awarding damages when an information return is issued in connection with a misclassified employee.  See guest blogger Omeed Firouzi and Can Intentionally Filing an Improper Information Return Justify a Claim for Damages Under Section 7434?…Part IV.


This kind of case is a more straightforward application of the statute, and exemplifies what Congress had in mind when imposing additional liability for issuing phony tax information returns.

Back to the family mess. By September of 2021, the dispute continued, with Muldrow emailing her aunt, demanding to speak to her mom, and sending emails and family pictures which her aunt allegedly did not show to her mom. 

In early 2022, Crittendon issued one 1099-MISC to Muldrow in the amount of $320,600 and another in the amount of  $29,470. That led Muldrow, a Georgia resident, to file a complaint in federal court seeking damages and an injunction.

Crittendon admitted that first Form 1099 was based on Muldrow causing $320,660.00 of damage to Defendants for “fraudulent, harassing, [and] defaming actions.” 

As the district court noted, and as readers no doubt know, “[t]his is not a basis for the issuance of a Form 1099. To hold so would allow potentially aggrieved parties to skip litigation and judgment in favor of simply assigning arbitrary values to Forms 1099 without due process whatsoever.”

The district court granted a preliminary injunction that ordered Crittendon to refrain from issuing any more incorrect 1099s and ordered her to issue two corrected 1099’s showing that she made no payments to her niece.

This is a pretty straightforward application of 7434, though there were some wrinkles. First, the complaint did not allege damages under 7434, but rather focused on a more general cause of action relating to generic damages, and the district court judge on their own came up with Section 7434 as a basis for awarding the statutory minimum of $5,000. In fact the appellate opinion notes that the plaintiff’s lawyer admitted at the hearing that they had not been aware of that Code Section. On appeal, Crittendon argued that the judge overstepped their authority by awarding damages without it being alleged in the complaint, but the Eleventh Circuit deemed the argument as waived, as it was not raised below.

In addition, I was not aware of 7434 as the springboard for injunctive type relief. Typically in order to grant injunctive relief, the party seeking relief must show irreparable harm, and courts have generally required more than economic harm to meet that standard. On appeal, Crittendon also challenged the finding that there was harm beyond economic harm.  While the lower court noted that injunctive relief has been granted with respect to false filings on the basis that the filings created administrative burdens, Crittendon noted that the lower court relied on cases pointing to burdens imposed on the IRS. Given that a private individual was seeking the injunction, rather than the government, Crittendon contended that her niece had not established that she suffered irreparable harm. While appeals courts typically review the granting of injunctive relief on a de novo basis, the appeals court also declined to entertain it on the merits due to it not being raised below.

In addition to these issues, there was also a question of jurisdiction of Crittendon in federal district court in Georgia, given her lack of connection to Georgia. As this too was not raised below, the court did not entertain the argument.

I am not sure how the court would have addressed these issues if they had been timely raised. What I am fairly certain of is that it is not a good idea to issue a 1099 because you have a personal or business dispute and you know that issuing a 1099 that is phony will trigger hassles with the IRS and state taxing authorities.

Third Circuit Offers a Potential Path to Jurisdiction Using Boechler

In a non-precedential, per curiam opinion in the case of Robinson v. Commissioner, No. 22-3120 (3d Cir. 2023) the court reversed the decision of the Tax Court to dismiss Ms. Robinson’s Collection Due Process (CDP) case and remanded the case to the Tax Court for it to consider whether her response to the motion to dismiss filed by the IRS could qualify as a petition.  The facts are important here but so is the Third Circuit’s interesting use of the Supreme Court’s Boechler opinion to find a possible path to jurisdiction for Ms. Robinson.


Ms. Robinson owes money to the IRS.  She requested a CDP hearing but filed her Tax Court petition before the IRS issued a notice of determination regarding her hearing.  It’s not clear why she jumped the gun, but she did not jump it by too much because the IRS did issue a CDP determination letter about three weeks after she filed her petition.  Because no CDP determination letter existed at the time of her petition, the IRS moved to dismiss her case for lack of jurisdiction.  She responded to the motion objecting to dismissal and attaching a copy of the then issued notice of determination.  Although her response addressed venue rather than jurisdiction, the Third Circuit gave her a hand.

The Tax Court dismissed her case citing the lack of a notice of determination at the time of the petition. 

The Third Circuit began by noting that the Tax Court properly determined that it lacked jurisdiction without a notice of determination.  It then stated:

The Tax Court dismissed the action for lack of jurisdiction without addressing whether Robinson’s objection could be construed as a petition for review of the notice of determination.

 That statement opens the door to jurisdiction wider than most might have thought possible.  After making this statement, the Third Circuit then reached back to a number of Tax Court opinions over the past five decades talking about how much the Tax Court tried to assist petitioners coming to its doors. 

The Tax Court, in its discretion, has generally “leaned over backwards” to “acquire jurisdiction by virtue of documents filed by taxpayers and intended as petitions even though the documents do not comply with the form and content of petitions prescribed in the Rules of the Tax Court.” Castaldo v. Comm’r, 63 T.C. 285, 287 (1974). 

It generally prefers to hold that it “has jurisdiction whenever possible so as to provide taxpayers with an opportunity to obtain judicial redetermination of their tax liability prior to the payment thereof.” Eiges v. Comm’r, 101 T.C. 61, 67–68 (1993); see also Gray v. Comm’r, 138 T.C. 295, 298 (2012) (explaining that claims in a petition “should be broadly construed so as to do substantial justice, and a petition filed by a pro se litigant should be liberally construed”). Because the Tax Court here did not address whether Robinson’s objection could be liberally construed as a second petition for review, we will vacate and remand so that it can make that determination. See, e.g., Goosby v. Comm’r, 117 T.C.M. (CCH) 1258 (2019) (treating the petitioner’s objection to a motion to dismiss a premature petition for review as a new petition seeking review of a notice of determination).

As I have discussed previously with regard to imperfect petitions, the Tax Court does make a concerted effort to assist taxpayers in getting in its doors; however, that effort has not extended to assisting taxpayers who were late or who were early.  The Vu case is a great example of the Tax Court not opening its doors to someone who was early.

Having pointed out the Tax Court generosity regarding jurisdictional determinations which regular readers of this blog will find interesting, the Third Circuit then goes on to determine that Boechler might create a path for the Tax Court to be generous to Ms. Robinson.  The objection she filed to the IRS motion to dismiss was filed more than 30 days after the notice of determination was issued; however, the Third Circuit notes that after Boechler taxpayers need not meet the 30-day time period if they have a good reason for missing it.  So, the Tax Court could use precedent such as Goosby to find that it has jurisdiction here.

The Third Circuit carefully states that the determination regarding equitable tolling is for the Tax Court, and it is not making a determination that Ms. Robinson had a good excuse for filing late.  Still, the decision shows an inventive way that Boechler could assist a taxpayer in getting their day in court.  It will be interesting to see how this case plays out on its return to the Tax Court.

Here’s to you Ms. Robinson.

Boyle and Baldwin Spell Penalty Trouble

Picture a taxpayer with over 100 years of pristine tax compliance history getting some unwelcome news: despite a dedicated and competent executive board headed by a hands on de facto CEO, an employee with a history of ensuring employment tax compliance, and an external auditor regularly checking on finances and bookkeeping, the taxpayer neglected to make employment tax deposits or file Forms 941 for the last two quarters of 2018 and the first quarter of 2019. This led the IRS to assess to over $500,000 in delinquency penalties. 


The taxpayer paid the penalties, filed a refund claim and eventually a refund suit, on the grounds that it had reasonable cause for its failure to file and pay. This is the basic set up of Operating Engineers Local Union Number 3 v United States, a case that breaks no new ground but illustrates how taxpayers must be ever vigilant when relying on employees to satisfy federal payroll tax compliance. Operating Engineers provides a useful vehicle to review two key procedural cases we have discussed many times before, Boyle v United States and Baldwin v United States.

Operating Engineers No. 3 (OE3) is the largest construction local union in the US. It had a longtime employee who was responsible for ensuring employment tax compliance in her position as Accounting Manager. When that employee was promoted in 2015 to Finance Director and Controller, the union hired a new Accounting Manager, who assumed the tax responsibilities. The employees, both the Accounting Manager and Finance Director, reported to the Executive Board, in particular the Board’s Business Manager who was effectively the CEO. In addition, the union had a longtime external auditor who provided a check on internal operations.

Fast forward to June of 2018: the Accounting Manager who had been working at the union for about three years resigned. Rather than hire a new manager, the old manager performed additional duties.  Just prior to the Accounting Manager’s departure, the Finance Director asked the soon to be departing employee to train one of her staff to assume the tax filing and compliance.  That did not happen, though the Finance Director did not appreciate that the departing employee did not train her subordinate to pick up the tax slack.

To make matters worse, starting in 2018 the Finance Director was experiencing personal problems due to her family losing their residence in that year’s deadly northern California wildfires. And there was conflicting evidence in the record as to whether the Finance Director recommended replacing the departing Accounting Manager: a member of the Executive Board claimed that the Director assured the Board that she could do both roles, but the Finance Director claimed that she recommended that the union hire a replacement.

Fast forward six months to December of 2018. The Director realized that the tax compliance had slipped through the cracks. She made all outstanding tax payments by the end of the month but she did not tell anyone on the Executive Board until the external auditors discovered the oversight in early 2019. In April 2019 two IRS Revenue Officers make an unannounced visit to the offices as the IRS had no record that the union had filed a Form 941 for the last two quarters of 2018. The Finance Director told the IRS employees that she had mailed those returns but could not produce additional evidence of mailing and reprinted the Forms and signed them and gave them directly to the Revenue Officers. (Of course, relying on handing a return to an IRS employee as proof of filing has its own issues. See Keith’s post on Seaview Trading here.)

After paying the penalties for failing to file and pay its employment taxes, OE3 sought a refund, arguing that its oversights were not due to willful neglect and that it had reasonable cause for its mistakes. The union emphasized that its process reflected ordinary business care, ensured tax compliance for over 100 years and that it had no knowledge of its employee’s mistakes:

[We] could not control [our employee’s] intentional act of omitting the payroll tax deposits from the financial reports. [The employee] had full control over the financial reporting to the CEO and the Board. The CEO and the Board did not have control over the financial reporting matters as the Government suggests. They were often out of the office and districts for meetings. Thus, OE3 was rendered objectively incapable of meeting its [payroll tax] obligations because the agent in control of financial reporting caused OE3’s disability.

Framing the problems on misconduct of the Finance Director reflects the slight crack in the formidable 1985 Supreme Court Boyle holding that it is inexcusable to delegate compliance responsibilities to an agent. The Court in Boyle distinguished reliance on an agent to perform a known duty from the question of the taxpayer’s disability, with the latter potentially amounting to a penalty defense.

A Third Circuit case, In the Matter of American Biomaterials Corp., 954 F.2d 919 (3d Cir. 1992), analogizes misconduct of corporate officers as effectively incapacitating a corporate taxpayer that may amount to reasonable cause to excuse delinquency penalties.

OE3 analogized its situation to a disabled taxpayer, given that it argued that it had no knowledge of her problems and had a sound practice of internal and external oversight. The district court distinguished Biomaterials, leaning on Ninth Circuit case Conklin Bros. of Santa Rosa v. United States, 986 F.2d 315, 317 (9th Cir. 1993). Conklin involved a controller who hid from her supervisors her failure to file returns and pay taxes, and who actively intercepted correspondence from the IRS and other evidence that would have let corporate officers know of the tax problems:

Applying Conklin to this case, it is clear as a matter of law that OE3 has not established reasonable cause to avoid the late penalty fees. The undisputed facts show that OE3 relied solely on [its employee], acting within the scope of her authority, to ensure that it met its payroll tax obligations during the periods in question. But OE3 “cannot avoid responsibility by simply relying on its agent to comply with the [tax] statutes.” Id. at 317. The undisputed facts also show that, as in Conklin, the circumstances resulting in OE3’s payroll tax delinquencies were not beyond OE3’s control.

What distinguished Biomaterials from Conklin and the union’s facts was that the misconduct in Biomaterials was at a higher level. Here, the Finance Director “was at all times subject to the direct supervision of OE3’s Business Manager… who could have seen to it that OE3 timely fulfilled its tax obligations.”

After failing to persuade the court that it had reasonable cause for its delinquencies, OE3 also argued that it in fact timely filed its third quarter 2018 payroll tax return. It argued that it was inappropriate for the government to prevail on summary judgment with respect to the filing penalty, pointing only to deposition testimony of the Finance Director, who claimed that she had mailed the return in the fall of 2018.

In granting the summary judgment motion, the opinion notes 2011 Treasury regulations that provide that taxpayers can only rely on Section 7502 to prove delivery.  Those regulations effectively bar the introduction of extrinsic evidence if there is no direct evidence of actual delivery to the IRS or no proof of proper use of registered or certified mail or an authorized private delivery service.

The Ninth Circuit upheld those regulations in Baldwin v United States (for a discussion of Baldwin see Carlton Smith’s Ninth Circuit Holds Reg. Validly Overrules Case Law; Disallows Parol Evidence of Timely Mailing). As such, given that OE3 could offer no admissible evidence to prove filing, the government was able to prevail on its motion for summary judgment.


What about the IRS’s first time abatement (FTA) policy? OE3 also argued that it should have received a one-time pass, but the court did not reach the issue, noting that its origins in the IRM render it not binding. Absent a handful of CDP cases that have pressed the issue of whether IRS failure to apply FTA is an abuse of discretion, courts have not applied it in refund cases like this.

Boyle’s bright line at times can lead to harsh outcomes, even if one might agree with the result. And from the union’s perspective two or three quarters of noncompliance in 100 years reflect a taxpayer that has taken their responsibilities seriously. As Keith has noted one can imagine a tax system like the Virginia DMV which allows a driver to build up positive points for driving a year with no violations up to five points.  The points can be used to mitigate when a violation occurs. While past compliance is not irrelevant when considering if a taxpayer can establish reasonable cause, other than the IRS’s discretionary FTA there is no mechanism for incentivizing past filing and paying compliance.

This case serves as a warning that boards and officers must keep close watch over tax matters; even longtime employees who have acted appropriately for years may experience personal and professional issues that can lead to sizable and unexpected sanctions.

Where Have All the Judges Gone (and Other Information from the ABA May Meeting) Part 2

The Tax Dispute Resolution Clinic at Texas A&M University School of Law in Fort Worth, Texas is hiring for the upcoming academic year. This is a full-time non-tenure Academic Professional Track faculty position (decanal hire rather than through the usual Appointments process) and would work with the current Director, PT’s own excellent Bob Probasco.  They are looking to hire someone who could start this summer, before the beginning of the Fall semester.  The job description and application link is here.

In addition to information about the loss of judges and making changes to the Tax Court’s calendars starting in the fall, Chief Judge Kerrigan gave a number of statistics about the Court during the past year.  I was writing these down as she spoke and need to caveat that mistakes could have been made in my transcription of her statements.  I also mention that the Court runs time frames differently than Chief Counsel and it’s possible that I correctly transcribed what was said but the numbers that appear here will differ from numbers you will see from Chief Counsel, IRS.


In 2022 the Court received 29,000 new petitions.  96% of the petitions sought relief pursuant to the Court’s deficiency jurisdiction.

In 2022 there were 54 in person calendars of the Tax Court taking place around the country and 83 remote calendars.  Judge Kerrigan indicated that she expects the Court to continue to change back to in person calendars but that the Court will not wholly abandon remote calendars.

In 2022 the Court issued 215 opinions broken up as 18 division opinions (I would call these precedential opinions); 131 memo opinions; 28 summary opinions (S cases) and 38 bench opinions.  The number of opinions is significantly down from historical highs.  For a detailed breakdown of court opinions over its years as an Article 1 court see the article by Caitlin Hird and me here.  The number of bench opinions has risen.  See an article on bench opinions by Tyler Moses and me here.  Perhaps the newer judges on the Court have embraced bench opinions in a way that some of the older judges did not.  Perhaps the pandemic had an influence.  Bench opinions do provide a way for the Court to quickly render the opinion; however, the Court’s rules hinder judges from issuing bench opinions by requiring their issuance prior to the end of the calendar on which the case was heard.

In 2023 the Tax Court is on a pace to exceed it decisional output from last year.  At the time of the Tax Section meeting, it had already issued 115 opinions broken down as 11 division opinions, 60 memo opinions, 18 summary opinions and 26 bench opinions.  Just because the number of opinions is down sharply from historical highs does not mean that the Court is less productive.  It now disposes of a significant number of cases through orders.  If you only follow opinions, you miss out on much of the Court’s decision making even though decision making through orders does not create precedent.

Judge Kerrigan said that in 2021 there were 36 limited entries of appearance and in 2022 there were 54.  I anticipate this number will continue to grow as practitioners become more comfortable with this tool.

Rich Goldman, Deputy Associate Chief Counsel, Procedure and Administration, spoke on the panel for Chief Counsel’s office as he has done for many years.  He foreshadowed the upcoming 100th anniversary of the Tax Court by giving some statistics from the beginning of the Board of Tax Appeals. The BTA began on July 16, 1924.  It received 30 petitions in July of 1924.  During the month of July 2022, taxpayers filed 2042 petitions. If I heard Rich correctly, he said that the BTA decided 11,000 cases in its first three years.  He said that 98% of tax litigation now occurs in the Tax Court.

The IRS issued 1,892,478 notices of deficiency in 2022. Most of these notices came from the Automated Underreporter Unit (AUR) – 1.5 million; 300,000 were issued by Automated Substitute for Return (ASFR) while field exam issued 15,000. (My notes may be inaccurate here because a few hundred thousand statutory notices issue each year from correspondence exam where all of the refundable credits exams take place.) 

Rich also spoke about some of the challenges facing Chief Counsel attorneys in answering cases.  They have difficulty verifying signatures in joint petitions.  He noted that Rule 25 treats ratification of an imperfect petition as restarting the time to file the answer.  He displayed some statistics which are available here.

May 2023 Digest

PT covered several important and long-awaited Court decisions in May, including Supreme Court decisions about the notice requirements for third-party summonses and state property tax strict foreclosures, an update in Mann Construction, and DC Circuit decisions about situs of the Tax Court and whistleblower jurisdiction and award limitations.

Important Case Updates

Supreme Court Finds For Government in Polselli Summons Litigation: The Supreme Court held that the IRS need not notify third parties when it issues a summons in the aid of collecting the tax liability of another person. Without notice, there is no clear path for district court review. The Court chose not to follow the 9th Circuit’s decision in Ip which said that notice is not required only when a liable taxpayer has legal interest in the accounts and records. Observations about the opinion, concurrence, and the impact the decision has on other areas are made in this post.

Property Tax Strict Foreclosure – A Final Update: The Supreme Court effectively ends the practice of strict foreclosure for unpaid property tax with its decision in Tyler. The Court determined the taxpayer had standing to bring the case and that the state violated the Fifth Amendment’s Takings Clause by engaging in the strict foreclosure practice.

The D.C. Circuit Strikes Back: The Court Affirms Its 2014 Holding That The Tax Court Is In The Executive Branch: In Crim, the DC Circuit followed its precedent in Kuretski to find that the Tax Court is an independent executive branch agency, but the majority and dissent’s analysis of the separation of powers issues raise new questions.

Latest Round of Litigation in Mann Construction Another Defeat For The Government: In the latest Mann Construction case, the Court denied the government’s motion to stay the Court’s earlier order which required the IRS to set aside the Notice at issue. The effect that a stay on one federal court has on other jurisdictions is a hot issue in this case and in administrative law generally.

DC Circuit Issues Awaited Whistleblower Opinion in Lissack v Commissioner: In Lissak, the DC Circuit clarifies that Whistleblower Office decisions are subject to court review when the IRS actually conducts an examination based on the submission, which distinguishes Lissak from Li. The Court also upholds the regulations’ approach to limiting awards to situations when information substantively connected to the eventual adjustment is provided, even if the IRS would not have otherwise examined the target. The post provides additional information about the case, outstanding issues, and current proposed whistleblower legislation.

DOJ Wins One Case and Loses Motions in Another Where POAs Signed First Refund Claims for Taxpayers, Part I & DOJ Wins One Case and Loses Motions in Another Where POAs Signed First Refund Claims for Taxpayers, Part II: This two-part post discusses cases that involve refund claims that were signed by POAs who didn’t check the box which would have authorized them to sign tax returns. The DOJ’s motion to dismiss was successful in Dixon and unsuccessful in Cooper. The posts analyze how cases with similar fact patterns resulted in different rulings, the role of the “duly filed” requirement, and the still unresolved tension between waiver cases and informal claim cases.

read more…

Taxpayer Rights and Insights

A Free Direct E-filing Tax Return System is a Fundamental Taxpayer Right: The Inflation Reduction Act directed the IRS to prepare a report about the costs associated developing and running with a free direct e-filing tax return system with a focus on multi-lingual and mobile-friendly features. In this post, Nina recounts the origins of the Free File Alliance which is the current free option that the IRS provides and makes a strong case for why a direct system is better.

Can a Taxpayer Successfully Sue When IRS Fails to Do What It Should Do: Two recent cases provide insight into whether judicial options are available when the IRS fails to do what it should do. In Kem, after the IRS ignored her math error abatement request, the taxpayer petitioned the Tax Court and made solid arguments about IRS’s obligations and the Court’s jurisdiction. The Court didn’t specifically address her arguments and the IRS didn’t acknowledge that it failed to follow math error procedures, but nonetheless issued her a refund. In Veg Invest Trust, the IRS ignored a CDP hearing request, so the taxpayer is suing for a refund in district court. The case has just begun so it’s one to watch for anyone whose correspondence, or client’s correspondence, has gone unopened, lost, or ignored.

Extension of Time for Payment of Tax Due to Undue Hardship: Part 1 and Extension of Time for Payment of Tax Due to Undue Hardship: Part 2: This two-part post shares a slightly modified version of an article that was originally published in the Journal of Tax Controversy. The article discusses the request for an extension to pay. Unless a deficiency is due to negligence, intent to disregard, or fraud, the IRS can extend the payment of a tax deficiency if the taxpayer would face undue hardship.

In The Room Where It Happens, It Doesn’t Always Happen Exactly Right and Back to the Room Where it Happens: Chris Rizek was in the room where the House and Senate’s competing provisions for innocent spouse reform were reconciled. Reflecting on the process, he finds it surprising that so much time has been devoted to analyzing the jurisdictional parentheticals and recalls that Congress’s overall goal was to expand, not limit, jurisdiction to review the IRS’s actions.

Tax Court Updates

Tax Court Expands Online Availability of Documents: During the ABA Tax Section Meeting, the Court announced that it will expand the online availability of Court documents. Beginning August 1, all newly filed posttrial briefs filed by practitioners admitted to practice before the Court and all newly filed amicus briefs filed pursuant to Rule 151.1 in non-sealed cases will be made available through DAWSON. This post delves into the details related to this and other changes.

Where Have All the Judges Gone (and Other Information from the ABA May Meeting) Part 1: The Court is currently operating with 16 Presidentially appointed judges out of a possible 19, with more vacancies upcoming, due to some judges awaiting reappointment and others being moved to senior status with no one in line to take their place. This post looks at the possible reasons for this, suggests increasing the number of special trial judges to process more cases, and looks at the history of special trial judges.

Serious Warnings for Frivolous Positions : The IRS issues the taxpayer a warning before making a section 6702 assessment even though it is not required by statute to do so. It is a step the IRS has imposed upon itself in the IRM and no cases have address whether failing to warn would provide a basis for setting aside the penalty. Similarly, the Tax Court gives the taxpayer a warning before issuing a section 6673 penalty, but does a taxpayer have a legal right to a that warning? This post explores why this question may become more important as time goes on.

Tax Court Decisions

Tax Court Says “Nutts” to Time Zone Filing Extension: Nutt is a precedential opinion in which the Tax Court (again) expressed its position that eastern time is the time zone which dictates the timeliness of a Tax Court petition. The issue has arisen in other cases, including Sanders where the petitioner who after multiple unsuccessful attempts, successfully filed less than a minute after the deadline. Under current law, the petition deadline cannot be equitably tolled, but Congress could amend section 7502 or allow time zone flexibility for matters where the amount is dispute is $50,000 or less per year.

Old Habits Die Hard: The Tax Court issued an order dismissing a late filed CDP petition for lack of jurisdiction in Floyd. The order was immediately rescinded by another order issued the same day. Boechler made such orders inapplicable since the deadline is no longer jurisdictional. Boechler also allows the Court to ignore CDP petition deadlines unless the IRS raises a concern, but it looks like it will take the Court some time to adjust.

Remand of a CDP Case: Whittaker was remanded back to Appeals after the Court found clear error in the rejection of the taxpayers’ offer in compromise. The taxpayers were close to retirement, so the IRM and Treasury Regulation allow their retirement account to be treated as income rather than an asset. They raised other valid arguments, but the record did not reflect that the arguments were taken into consideration. The case provides a glimpse into how the judicial process can shape the administrative process and demonstrates how important it is to have a judicial check on the IRS’s collection powers.

Trust and Bankruptcy Decisions

Uncertainty Over Bankruptcy Court Jurisdiction in Innocent Spouse Cases Seeking Equitable Relief: The Court in Geary held that bankruptcy courts do not have jurisdiction to determine whether a taxpayer qualifies section 6015(f) innocent spouse relief. Unlike (b) and (c) relief, the Court concludes that Congress unambiguously limited the authority to grant (f) relief to the IRS.

The Perils of Electing to Carry Forward a Tax Refund When Filing Bankruptcy: The taxpayers in Miller v. Wylie elected to apply their sizable 2018 federal and state refunds to their 2019 income tax liabilities five months before filing for bankruptcy. The bankruptcy trustee alleges that the carry forward election was a transfer which concealed property with the intent to hinder, delay, or defraud a creditor with the meaning of BC 727(a)(2)(A). The court disagreed and found that the election is a preference of the IRS over other creditors, which could cause the funds to be clawed back into the estate but would not rise to the level of denying a discharge.

IRS Loses Injunction Case Against Mother After Raising Its Eyebrow: In U.S v. DuBois the Court decided against enjoining a mother from using proceeds from a settlement. She and her tax-owing son were beneficiaries of a trust and sued the trustee for breach of fiduciary duty. While the suit was pending, the IRS brought suit against her son for failing to pay income taxes. The mother and son settled with the trustee and the son immediately assigned his rights to settlement to his mother for no consideration. The son argued that he had agreed to assign his interest earlier before becoming aware of the IRS’s suit. The argument raised some eyebrows but was ultimately successful since the IRS didn’t present evidence to refute it.

Property Tax Strict Foreclosure – A Final Update

Guest blogger Anna Gooch of the Center for Taxpayer Rights follows up on prior posts and discusses the Supreme Court’s decision in Tyler v Henepin County. Anna was an early and prescient commentator on how a state’s use of strict foreclosure raises significant constitutional issues. Les

I have twice written (here and here) on strict foreclosure by state and local governments. Strict foreclosure allows the creditor to obtain both the legal and equitable title to the property upon foreclosure, meaning that the owner-debtor never receives any amount received in excess of the amount of debt owed. In my last post, I wrote about several cases, including Tyler v. Hennepin County. On Thursday, May 25, the Supreme Court rendered its decision in Tyler. In a unanimous opinion, the Court delivered a victory for property owners and for taxpayer rights.


A summary of the facts and lower court proceedings is necessary before delving into the Supreme Court’s opinion. Geraldine Tyler, who is currently 94 years old, purchased a condo unit in 1999 in Hennepin County, Minnesota. She lived there by herself until 2010, when she and her family agreed that it would be best for her to move into a senior living community. She retained ownership of her condo, but neither she nor anyone in her family made any property tax payments once she moved out.  By 2015, the amount of unpaid property tax, including penalties and interest, was about $15,000. In that year, pursuant to both Minnesota and Hennepin County law, the county began foreclosure proceedings against Ms. Tyler’s condo to recover the unpaid balance. The county sold the condo for about $40,000. Ms. Tyler never received the difference between the sale proceeds and the unpaid debt, nor did she have an opportunity to request that it be returned to her.


Minnesota, along with several other states, authorizes counties to pursue strict foreclosure to recover unpaid property tax. This means that in the event of default, the county can take both legal and equitable title to the property. There is no opportunity for the property owner to recover the equity that remained after the sale. Strict foreclosure transfers to the creditor any property interest that the owner had in the property before the foreclosure.

Ms. Tyler sued the county, arguing that strict foreclosure violates both the state and federal constitutions. Specifically, she argued that the practice violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s Excessive Fines Clause. The District Court and the Court of Appeals both agreed with the county. The Eighth Circuit Court of Appeals affirmed the District Court’s holding that Ms. Tyler failed to state a claim upon which relief could be granted. They agreed that Ms. Tyler no longer had a property interest that could be protected by the Takings Clause. Neither court discussed the Eighth Amendment issue. Ms. Tyler, the named plaintiff in this class action, then appealed to the Supreme Court.

The Supreme Court Opinions – Standing

The unanimous opinion, written by Chief Justice Roberts, first addresses the threshold question of standing and whether Ms. Tyler plausibly stated a claim. The Court quite plainly states that Hennepin County’s refusal to refund to Ms. Tyler the equity that remained after the satisfaction of her property debt “is a classic pocketbook injury sufficient to give her standing.” The Court also addresses a new claim from the County that had not been raised previously. The County now argues that there was a mortgage remaining on the condo, so even if it wanted to, the County could not return the excess proceeds to Ms. Tyler because it would be required to apply those proceeds to the mortgage. The Court rejects this argument on two grounds. First, the County never provided any evidence of any encumbrances to any Court. Second, Minnesota law extinguishes any encumbrances after a tax sale.

The Supreme Court Opinion – Takings Clause

Having determined that Ms. Tyler had standing and that she properly stated a claim, the Court discusses whether the harm that Ms. Tyler suffered was a result of Hennepin County’s violation of the Takings Clause.

Just as the court did in a similar case called Hall, which I blogged about in February, the Supreme Court here focuses on the history of the concept of property and of takings. The Fifth Amendment and the Takings Clause do not define “property.” However, centuries of English and American support the position that an equity interest in property cannot be extinguished without compensation. Indeed, many states have taken affirmative steps to overturn historical practices of strict foreclosure. States cannot legislate around this history, and many have not. Over thirty states and the federal government do not permit strict foreclosure. Similarly, the Court’s precedent indicates that even in extreme circumstances, excess proceeds from tax sales must be returned to the owner. The Court has long held that even when a statute governing tax sales is silent as to the requirement of the return of excess proceeds, it is assumed that proceeds should be returned to the owner, absent an opportunity to request that the proceeds be returned.

The Court also discusses the fact that Minnesota law only allows for strict foreclosure when the government is the creditor; no other creditor is permitted to retain equity remaining after a sale. The Court rejects this exceptionalism, stating, “Minnesota may not extinguish a property interest that it recognizes everywhere else to avoid paying just compensation when it is the one doing the taking.”

Finally, the Court addresses the County’s allegation that even if a property owner does not lose their ownership in the equity of the property by the initiation of a foreclosure, Ms. Tyler had long abandoned her interest by not paying property tax. Consequently, the County argues, Ms. Tyler had lost her property interest before the County initiated any proceeding against her. The Court readily rejects this proposition, stating that “the County cites no case suggesting that failing to pay property taxes is itself sufficient for abandonment.” Moreover, “Minnesota’s forfeiture scheme is not about abandonment at all. It gives no weight to the taxpayer’s use of the property.”

The Court easily concludes that Ms. Tyler retained an equity interest in her home when Hennepin County began foreclosure proceedings – the County was not permitted to destroy it by legislation, to alter it by excepting itself, or to deem it abandoned.

The Gorsuch/Jackson Concurrence

Just as we saw in Bittner, Justices Gorsuch and Jackson joined together. Their concurrence addressed Ms. Tyler’s 8th Amendment Excessive Fines claim, which had been addressed by neither the lower courts nor the Supreme Court’s majority. The County argued and the District Court agreed that its strict foreclosure practice did not violate the Excessive Fines Clause because the practice was not punitive. They provided three justifications for this position, all of which the concurrence rejects. First, they asserted that the “primary purpose” of the strict foreclosure law was remedial rather than punitive. The concurrence emphatically responds, “This primary-purpose test finds no support in our law.” Second, the County argued that the law is not punitive because a property owner might end up in a positive position if the County is only able to recover less than the amount of tax owed at the foreclosure sale. The Court responds, “Not has this Court ever held that a scheme producing fines that punishes some individ­uals can escape constitutional scrutiny merely because it does not punish others.” Finally, the District Court held that the law was not punitive because it did not turn on the property owner’s culpability, but rather serves as a deterrent to property owners. The Court responds that it has “never endorsed” such an interpretation. Though merely informative, this concurrence serves as a signal to the state courts that they “should not be quick to emulate” the analysis of the District Court in Tyler.


As the Court points out, strict foreclosure is not common. Neither the federal government nor a majority of states allow the practice. However, the fact that 14 states that did authorize strict foreclosure (before this opinion) is not insignificant. The Court’s unanimous decision in Tyler not only effectively ends the practice of strict foreclosure for unpaid property tax, but it also suggests that the Court is dedicating itself to the protection of taxpayer rights, at the federal, state, and local levels.

DC Circuit Issues Awaited Whistleblower Opinion in Lissack v Commissioner

Lissack v Commissioner is an important DC Circuit whistleblower opinion that clarifies the extent to which Whistleblower Office (WBO) decisions are subject to court review. Lissack also upholds under Chevron review the regulations’ approach to limiting awards to situations when the information provided is substantively connected to an eventual adjustment, even if the IRS would not have examined the taxpayer but for the informant identifying the targeted taxpayer.


In Lissack, which a guest post prior to this opinion discussed here, a whistleblower submitted information to the WBO about a condominium development group that allegedly evaded taxes due to its treatment of golf club membership deposits. The WBO investigated and found the claim credible, but the IRS found that the condo group’s income tax treatment of the deposits was correct. In examining the group, the IRS did discover an unrelated issue: it had taken an erroneous $60 million intercompany bad debt deduction.

About eight years after Lissack submitted his application for award, the WBO denied his claim, stating that the information that he submitted about the tax treatment of the deposits was not relevant for the bad debt deduction. While there was no dispute that the IRS’s investigation into the taxpayer was attributable to Lissack’s application to the WBO, the information was substantively unrelated to the IRS’s eventual bad debt adjustment and ultimate tax collection.

The Tax Court granted summary judgment to the IRS, holding that even though the IRS “did initiate an action” based on Lissack’s information he was ineligible for an award because “the IRS did not collect any proceeds as a result of…” an action or related action, as those terms are defined in the 7623 regs.

On appeal the government argued that the Tax Court did not have jurisdiction to review the IRS’s award denial. On appeal, the government also defended the validity of regulations that effectively denied awards when an informant’s information about an identified taxpayer is substantively unconnected to the issue that the IRS finds to be improper.

In Lissack, the DC Circuit Court of Appeals held that (1) the Tax Court had jurisdiction to consider the IRS’s denial of a whistleblower claim, (2) regulations under Section 7623 are valid under the still (for now) relevant Chevron two-step framework and (3) under those regulations it was proper for the IRS to deny Lissack any award.

The Tax Court Had Properly Exercised Jurisdiction

The government’s threshold argument was that its decision to deny the claim was unreviewable. In arguing that the WBO’s decision was not subject to review, the government relied on Li v Commissioner, where, as Keith discussed here, the DC Circuit held that a rejection of an application for a mandatory award on  Form 211 was not a reviewable award determination.

In Li, the DC Circuit held that a “threshold rejection of a Form 211 by nature means the IRS is not proceeding with an action against the target taxpayer,” and that “[t]herefore, there is no award determination, negative or otherwise, and no jurisdiction for the Tax Court.” 

Distinguishing Li, the DC Circuit in Lissack held that even though no award was given there was in fact a determination that triggered court review:

The fact that the IRS conducted an examination here suffices to distinguish Lissack’s case from Li.  Li never claimed that the IRS proceeded with any administrative or judicial action against the target taxpayer based on her submission…Here, by contrast, there is no dispute that the Whistleblower Office referred Lissack’s submission to the IRS, and an IRS revenue agent initiated an examination of the membership-deposits issue that Lissack identified.  That referral and examination count as the IRS “proceed[ing] with” an “administrative action” that was “based on” the information Lissack brought to the Secretary’s attention.  I.R.C. § 7623(b)(1).  And the “determination regarding an award” was the Whistleblower Office letter to Lissack informing him that the examination it initiated based on the information he provided did not result in the collection of any proceeds, so he was not entitled to an award.  

In arguing that Li applied to this case, the government was effectively arguing that judicial review of a WBO action was predicated on its finding that a whistleblower had made a meritorious claim. In Lissack the DC Circuit has limited the reach of Li, and while under Li judicial review requires that the IRS proceed with a claim there is no jurisdictional requirement that the IRS have “collected proceeds” based on the whistleblower’s information.

The DC Circuit Upholds the Regs

After finding against the government on the question of reviewability, on the merits, the DC Circuit looked to the regulatory requirements. Lissack argued essentially that under the plain language of the statute he was entitled to an award because but for the information he supplied the IRS would not have proceeded with an examination against the condo group.

The opinion frames the challenge, starting with the relevant statutory hook:

He challenges the regulatory provisions that control the IRS’s determinations whether any proceeds were “collected as a result of” an IRS “administrative action” to which a whistleblower “substantially contributed.”  I.R.C. § 7623(b)(1). 

First, he challenges the provision of the Rule defining an “administrative action” that the IRS treats as “based on” a whistleblower submission under subsection (b)(1) to be “all or a portion of” a proceeding that may yield collected proceeds.  26 C.F.R. § 301.7623-2(a)(2). 

Second, he challenges an example (Example Two) that illustrates how, when the IRS discovers “additional facts that are unrelated to the activities described in the information provided by the whistleblower” and accordingly expands the scope of the examination, the investigation into those unrelated facts “are not actions with which the IRS proceeds based on the information provided by the whistleblower.”  26 C.F.R. § 301.7623-2(b)(2) (Example 2).  

The parties both agreed that Chevron applied, and identified two key Step 1 questions:

First, whether the tax whistleblower statute requires the IRS to consider the “whole action”—in this case, all its examination activity—regarding one taxpayer as a single administrative action….

[Second,] whether the statute mandates an award whenever the whistleblower’s information was the but-for cause to initiate an investigation of the taxpayer, even if the ultimate basis for the IRS’s collection of proceeds found no factual support in the information the whistleblower provided.

The opinion finds under Chevron Step 1 that the statute does not require the IRS to consider the whole action nor mandate a but for causation approach to determining whether there is a collection of proceeds.

In the absence of the statute speaking directly to those issues, the DC Circuit finds that the regulatory approach was reasonable:

The ordinary meaning of “administrative action”—activities by executive agencies— may in this context sensibly be limited to action on the discrete tax issue or issues the whistleblower’s information identifies.

Further buttressing its Step 2 conclusion, the opinion discounts Lissack’s policy-based argument that he “provided ‘valuable information’ by informing the IRS that the development group taxpayers ‘are the type of taxpayers to misstate their tax liability generally, and debt in particular’”:

[T]here is ample reason to doubt that Congress meant to entitle whistleblowers to substantial awards just for raising plausible but meritless concerns about taxpayers who, on investigation by the IRS, turn out to be noncompliant in some other, unrelated way.  Such a regime likely would encourage whistleblowers to flyspeck major taxpayers, identifying any plausible underpayment in the hope of triggering an examination yielding some other, major adjustment.  The IRS approach, in contrast, calibrates mandatory awards to the fruits of the particular IRS actions that the whistleblower’s information substantially assists.


While the opinion on the merits is a victory for the government, the threshold jurisdictional question is a victory for the whistleblower bar.

The opinion is also significant for what it declined to consider, including whether the Tax Court must conduct a trial de novo on an appeal of a WBO determination and the standard of review that applies to a challenge to the scope of the record the IRS submitted to the Tax Court.

In declining to entertain those issues, the DC Circuit noted that Lissack failed to request that the Tax Court “expand the administrative record or create a new one”, issues that spin off the Administrative Procedure Act and the Kasper decision that I discussed a few years ago here and more recently here.  

While noting that Lissack effectively waived these issues by failing to act below, the DC Circuit acknowledged (as has the Tax Court) that some whistleblower cases will warrant discovery and exceptions to the record rule. By failing to see how the exceptions or the need for new evidence might have benefitted Lissack, the DC Circuit was able to sidestep those issues.

While those issues await another case, the proposed Whistleblower Program Improvement Act that Senators Grassley, Wyden, Wicker, and Cardin introduced earlier this year  would provide for a de novo standard of review and “allow for new evidence to be admitted to the record based on the administrative record established at the time of the original determination and any additional newly discovered or previously unavailable evidence.”  Readers of PT know that the “newly discovered” or “previously unavailable” framework are also part of the Taxpayer First Act amendments to innocent spouse cases. Let’s hope that if legislation progresses, Congressional staff take a hard look at this standard, and consider how those terms are far from self-defining.